Wednesday, July 22, 2015

Third Circuit holds that the IRS can compel production of foreign bank records over a Fifth Amendment assertion

Third Circuit holds that the IRS can compel production of foreign bank records over a Fifth Amendment assertion
The Court of Appeals for the Third Circuit in U.S. v. Chabot, 2015 WL 4385279 (3rd Cir. 2015) affirmed a New Jersey District Court decision and held that the "required records" exception to the Fifth Amendment privilege against self-incrimination applies to allow the IRS to enforce a summons of foreign bank account records.
Background 31 CFR 1014.420 requires a taxpayer to file a Report of Foreign Bank and Financial Accounts (“FBAR”) to report financial accounts in foreign countries where the aggregate of such accounts exceeds $10,000. The Fifth Amendment states that "[no] person... shall be compelled in any criminal case to be a witness against himself." An individual may claim this privilege if compelled to produce self-incriminating, "testimonial communications." The act of producing documents may trigger the Fifth Amendment privilege. Fisher v. U.S., 425 U.S. 391 (1976). But there is an exception to the 5th Amendment called the “required records exception.” This exception states that when records are required to be maintained for a legitimate purpose, the 5th amendment does not apply to such records.
In Shapiro v. U.S., 335 U.S. 1 (1948), the Supreme Court held that the Fifth Amendment privilege is not abrogated by requiring that taxpayers maintain records as long as the records closely served the purpose of a valid, civil regulation. As set forth in Grosso v. U.S., 390 U.S. 62 (1968), three prongs must be met to fall within the required records exception: (1) the reporting or recordkeeping scheme must have an essentially regulatory purpose; (2) a person must customarily keep the records that the scheme requires him to keep; and (3) the records must have "public aspects."
The Chabot case. IRS issued summonses to Mr. and Mrs. Chabot requesting documents required to be maintained under 31 CFR 1014.420. The Chabots refused claiming the 5th Amendment privilege. The New Jersey District Court ruled that the summonses were proper under the required records exception and the Third Circuit just affirmed. The Third Circuit analyzed the three Grosso prongs and determined all three were met.
Conclusion For anyone still holding assets abroad without disclosing them, be aware that the IRS may obtain the records through summons enforcement. As such, such taxpayers should consult counsel and strongly consider entering into either the offshore voluntary disclosure program or the streamlined program.